D16. What is the general principle on receipting of donations of services?

D16. What is the general principle on receipting of donations of services?

Short answer

Contributions of services (that is, time, skills, or effort) do not
qualify as gifts. At law, in order for there to be a gift, there must be a transfer
of property; services do not involve such a transfer.

Long answer

A charity can, however, pay for services rendered and later accept the return
of all or a portion of the payment as a gift, provided it is returned voluntarily.
This is often referred to as a cheque exchange. In such a case, a charity should
make sure that it keeps a copy of the invoice issued by the service provider.
The invoice and cheque exchange not only ensure that the charity is receipting
a gift of property, but they also create an audit trail, as the donor must account
for the taxable income either as remuneration or as business income.

A charity should not issue an official donation receipt to a service provider
in exchange for an invoice marked “paid”. Eoing so would raise
questions about whether any payment has been transferred from the charity to
the service provider and, in turn, whether any payment has been transferred
back to the charity.

(Although, in some circumstances, CRA does permit a charity to issue a donation receipt to volunteers, in lieu of re-imbursing expenses incurred by the volunteer, this practice does not extend to service providers. For more information on when volunteers can receive a donation receipt, see question S30. Re-imbursed expenses are not income for a volunteer, and do not have to be reported as remuneration or business income.)

Example

ABC Landscaping ploughs the snow and sands the parking lot of a charity.

Between January and March, ABC cleans the charity's parking lot ten
times.

Each cleaning is worth $200.

At the end of March, the owner of ABC says, “Just give me a
donation receipt for $2,000.”

Can the charity issue a donation receipt to ABC?

No. The charity cannot issue a receipt. Gifts must involve
a transfer of property; providing a service does not involve a transfer
of property.

However, ABC could bill
the charity for the $2,000. The society would pay the invoice.

If ABC subsequently gives the charity $2,000, or another amount, ABC
can receive a donation receipt for that amount.

Longer answer

Sometimes the line between what constitutes a property and what constitutes
a service is quite clear. If an individual or company cleans the charity’s
office, the individual or company is providing a service rather than a property
and this cannot be receipted as a gift in kind.

Other scenarios are less clear, either because it is not certain whether the
scenario involves a service or property or whether the donor can be considered
to have transferred property to a charity. For example, can a website be considered
property for the purposes of making a gift? The Income Tax Rulings Directorate
considers such proposed transactions on a case-by-case basis.

D17. What are the general principles on receipting of capital property as gifts?

D17. What are the general principles on receipting of capital property as gifts?

Short answer

Capital property is depreciable property that, if sold, would result in a
capital gain or a capital loss to the owner. Capital property does not include
the trading assets of a business, such as inventory. The deemed fair market
value of a gift of capital property made by a taxpayer is used by the charity
to determine the eligible amount of the gift for receipting purposes.

Long answer

The following properties are generally capital properties:

- cottages;
- securities, such as stocks, bonds;

and

- units of a mutual fund trust and land, buildings, and equipment used
in a business or a rental operation

Generally, a taxpayer or corporation that gives capital property as a gift
is deemed to have received proceeds of disposition equal to the fair market
value of the property, subject to the deemed fair market value rule. If the
fair market value of the property exceeds its adjusted cost base, the taxpayer
or corporation will realize a capital gain as a result of such a disposition.
A taxpayer or corporation can reduce the capital gain, however, when the gift
or bequest of a capital property is made to a registered charity.

In addition, if a donor makes a gift of capital property to a registered
charity and the fair market value (or deemed fair market value, if applicable)
of the donated capital property is determined to be more
than its adjusted cost base, the donor may designate an amount that is less
than the fair market value to be the proceeds of disposition. This may allow
a donor to reduce the capital gain otherwise calculated.

Any such amount that a donor chooses to designate in respect of the donation
must be within the following limits:

(a)

it cannot be more than the fair market value of the property
at the time the gift is made

and

(b)

it cannot be less than the adjusted cost base of the property.

The designated amount is deemed to be the proceeds of disposition of the
property. It is also considered to be the fair market value (or deemed fair
market value, if applicable) of the gift made by the taxpayer for the purposes
of determining the amount of the deduction or tax credit. Furthermore, this
amount is used by the charity to determine the eligible amount of the gift
for receipting purposes.

Keep in mind that a charity always issues the receipt for fair market value
or deemed fair market value. The donor may choose to use the adjusted tax
base.

Note

Because of the complexity of capital property as gifts, a charity
will benefit from seeking professional help in sorting out all related
issues.

D18. What are the general principles on receipting gifts of certified cultural property?

D18. What are the general principles on receipting gifts of certified cultural property?

Short answer

Certified cultural property is property that has been determined by the Canadian
Cultural Property Export Review Board to be of “outstanding significance
and national importance” to Canada. The Review Board issues tax certificates
for the fair market value of such items. Certified cultural property can include,
among other examples:

art

archival material

decorative arts

musical instruments

military objects

technological objects

Long answer

Special incentives have been created to encourage Canadians to keep in Canada
cultural property that is of outstanding significance and national importance.
Under the Cultural
Property Export and Import Act, people can donate this type of property
to Canadian institutions and public authorities that have been designated
by the Minister of Canadian Heritage. You can find a list of institutions and authorities designated by the Minister of Canadian Heritage here

The eligible amount of the gift is calculated based on the fair market value
of the property, as of the date the donor legally transferred ownership.

The fair market value of the donated property, as determined
by the Canadian Cultural Property Export Review Board, applies for a 24-month
period. When that 24-month period lapses, the fair market value is re-determined
and the new value holds for the following 24 months. When a donor makes a
gift of the property, it is the last determined or re-determined fair market
value that is used to calculate the eligible amount of the gift.

Note

As this is another complex area, charities receiving gifts of certified
cultural property will benefit from professional help in sorting out
related issues.

D19. Does cultural property have to be certified by the Canadian Cultural Property Export Review Board to be considered a gift-in-kind?

D19. Does cultural property have to be certified by the Canadian Cultural Property Export Review Board to be considered a gift in kind?

Short answer

No, not all cultural property has to be certified by the Review Board. Cultural
property not certified by the Review Board is considered
a regular gift in kind. So, the charity receiving the non-certified property
may still issue an official donation receipt based on the fair market value
as determined for any gift in kind (see FAQ
D4). The donor would NOT receive the tax advantages described in FAQ
D18 for certified cultural property.

Exception

Cultural property donated to registered charities or other qualified donees
within Canada that are not designated Canadian institutions or public authorities
is not subject to valuation through the Review Board process.

D22. Our charity received a donation of ecologically sensitive land from a farmer. Can we issue an official donation receipt?

D22. Our charity received a donation of ecologically sensitive land from a farmer. Can we issue an official donation receipt?

Short answer

It depends. In order for an official donation receipt to be issued, the donation
must:

fully qualify as a gift under Canadian tax law
and

must meet the requirements for ecologically sensitive land.

Long answer

For it to be a gift, there must be a voluntary transfer of property. For
example, a farmer donated a part of her land to your charity because as a
condition for developing a portion of her property, she must donate part of
her land for parkland. This donation would not qualify as a gift, as it was
not voluntary.

All requirements for the gifting of ecologically sensitive land must also
be met before a donation will be considered and treated as such. The requirements
include:

the charity must be approved as an environmental charity and

each donation of land or a partial interest in land must be certified
as ecologically sensitive before it can be included under the Ecological
Gifts Program. The federal Minister of the Environment or a designated authority
carries out this certification.

More…

A gift of ecologically sensitive land is dealt with in FAQ D20 and D21. Because
of its complexity, a charity may wish to seek professional advice in dealing
with this kind of donation.

D23. What are the general principles on receipting of gifts of ecologically sensitive land?

D23. What are the general principles on receipting of gifts of
ecologically sensitive land?

Short answer

Gifts of ecologically sensitive land to a municipal or public body performing
a function of government in Canada qualify for favourable tax treatment.
Corporate donors may deduct the amount of their ecological gifts (eco-gifts)
directly from their taxable income, while the value of an individual’s
eco-gift is converted to a non-refundable tax credit. Donors of eco-gifts
also receive a reduction in the taxable capital gain realized on the disposition
of the property.

There are a number of steps involved in this process, including

arranging the donation

preparing and filing information on ecological sensitivity and

determining the fair market value of the donation.

Long answer

In order to receive a gift of ecologically sensitive land, a registered
charity must:

have as one of its primary purposes “the conservation and protection
of Canada’s environmental heritage” or some similar statement
acceptable to the federal Minister of the Environmentand

apply to Environment Canada for eligibility.

In addition, before it can be included under the Ecological Gifts Program,
a donation of land or a partial interest in land must be certified as ecologically
sensitive, that is, important to the preservation of Canada’s environmental
heritage. The federal Minister of the Environment or a designated authority
carries out this certification.

The Minister—through the offices of an appraiser—will also
ultimately determine the fair market value of the gift. For a gift of a
covenant or an easement or, in Quebec, a real servitude, the fair market
value of the gift will be the greater of:

the determined fair market value of the giftor

the amount of the reduction of the land’s fair market value that
resulted from the gift.

The fair market value of the donated property, as determined by the Minister,
will apply for a 24-month period after the last determination. When 24 months
have elapsed, a re-determination is required. The last determined or re-determined
value is the value a charity must use to calculate the eligible amount of
the gift, whether the gift is claimed as a gift of ecologically sensitive
land or as an ordinary charitable gift.

Donors may gift fee simple donations (comprehensive rights to the real
property) or partial interests (any one or combination of lesser rights
short of a fee simple donation). Whether fee simple donations or a donation
of a partial interest in land, all owners have a responsibility to maintain
the biodiversity and environmental heritage of these properties in perpetuity.

D24. A donor wants to give our charity some ecologically sensitive land, but also wants to pass it on to her heirs. What does our charity do if the donor wants to maintain some connection with the land?

D24. A donor wants to give our charity some ecologically
sensitive land, but also wants to pass it on to her heirs. What does our charity do if the donor wants to maintain some connection with the land?

Short answer

Although many eco-gifts are outright donations of land with no conditions
(called “fee simple” donations), making such a gift does not necessarily
mean severing the connection donors have with their land. There are options
available.

Long answer

A conservation easement, covenant, or servitude is an agreement that is
registered on title and that protects a property’s conservation value
by permanently placing terms and conditions on its use that are determined
by the donor. It can place limitations on subdividing, the number and location
of structures, and the types of land use. Under the terms of the agreement,
the donor continues to own the land and may live on it, sell it, or pass it
on to heirs. The recipient ensures that the restrictions put on the property
are followed in the future, regardless of who owns the land.

Whether your charity receives a fee simple donation or a donation that is
a partial interest in land, in exercising your rights both you and the donor
have a responsibility to maintain the biodiversity and environmental heritage
of these properties in perpetuity.

D25. Our charity received a gift of mortgaged property. In what amount should we make out the official donation receipt?

D25. Our charity received a gift of mortgaged property. In what amount should we make out the official donation receipt?

Short answer

In order to determine the value of mortgaged property, your charity will
have to consider all relevant factors, including market prices, the terms
and conditions of the mortgage, and the amount and conditions of any other
charges on the property.

In order to determine the eligible amount, it will be necessary to value
the mortgage. Accurate valuation of a mortgage may involve examining the terms
and conditions of the arrangement and not just calculating the outstanding
principal. To do this, you may wish to hire an expert in the area.

Example

A house is transferred to a charity. The only advantage given by the charity
is the assumption of the mortgage. The fair market value of the house is
$575,000. The amount of the mortgage being assumed by the charity is $124,000.

If the terms and conditions of the mortgage were in line with the current
market, the eligible amount would be $451,000 ($575,000 – $124,000
= $451,000).

The terms and conditions of the mortgage could be unfavourable, however.
For example, high interest rates or high penalties for transfer might result
in the charity having to pay a third party $150,000 to assume the mortgage.
In such a case, the eligible amount would be $425,000 ($575,000 –
$150,000 = $425,000).

Note: If any other advantage were being given to the
charity, the amount of that advantage would also have to be considered when
determining the eligible amount.

D26. What are the general principles on the receipting of charitable annuities?

D26. What are the general principles on the receipting of charitable annuities?

Short answer

A charitable gift annuity is an arrangement under which a donor contributes
funds to a charitable organization in exchange for guaranteed payments for
life at a specified rate depending on life expectancy or for a fixed term.
When this occurs, the advantage received by the donor is a stream of guaranteed
payments for a period of time.

The eligible amount for receipting

of the amount contributed by the donor

is equal to the excess

______________over__________________

the amount that would be paid at the time of donation
to an arm’s length third party, like a trust company or bank,
to acquire an annuity to fund the guaranteed payments.

Example

A donor makes a $100,000 contribution to a charitable organization.

The donor’s life expectancy is eight years.

The donor is to be provided annuity payments of $10,000 per year,
which amounts to $80,000 over eight years.

The cost of an annuity that will provide $80,000 over eight years
is $50,000.

Tax treatment

The donor receives an official tax receipt for $50,000 for the year
of donation.

The donor receives $80,000 in annuity payments, of which $30,000
will be included in income over the eight years.

As indicated, the eligible amount for receipting is
equal to the excess of

$50,000

over the amount contributed by the donor over

$100,000

The amount that would be paid at the time of donation to an arm's
length third party, like a trust company or bank, to acquire an annuity
to fund the guaranteed payments equals

$50,000

Long answer

Charitable annuities issued after December 2002 are taxed under the Income
Tax Act in the same manner as all other annuity contracts are taxed. Assuming
the annuity is a “prescribed annuity contract” as defined in subsection
304(1) of the Income Tax Regulations, annuity payments are included in the
taxpayer’s income in the year the payments are received and the taxpayer
may claim a deduction in respect of the capital element of the payments.

While charities are advised to seek professional help in sorting out charitable
annuities, specific reference should be made to section 300 of the Regulations.
The calculation of the capital element of a life annuity apportions the “adjusted
purchase price” of the donor’s interest in the annuity (that is,
the cost of the annuity) over the expected life of the donor. The expected
life of the donor is determined by referring to the 1971 Individual Annuity
Mortality Table as prescribed in Volume XXIII of the Transactions of the Society
of Actuaries.

D27. Our charity has been given a "charitable remainder trust". What is it and how is it receipted?

D27. Our charity has been given a "charitable remainder trust".
What is it and how is it receipted?

Short answer

Generally, a charitable remainder trust involves transferring property to
a trust whereby the donor or beneficiary retains a life or income interest
in the trust but an irrevocable gift of the residual interest is made to a
registered charity. A charitable remainder trust may be created either through
provision in a will (a testamentary trust) or through a living (inter
vivos) trust established and effective during the lifetime of the donor.
Your charity can issue an official donation receipt for the fair market value
of the residual interest at the time that the residual interest vests in your
charity.

Long answer

The Canada Revenue Agency will consider a gift of residual interest to have
been made if all of the following requirements are met:

property is transferred

the property must vest with the recipient charity at the time of transfer.

A gift is vested if:

the person or persons entitled to the gift are alive and their
whereabouts is known,

the size of the beneficiaries’ interests are ascertained,
and

any conditions attached to the gift are satisfied.

the transfer must be irrevocable and

it must be evident that the recipient organization will eventually receive
full ownership and possession of the property transferred.

The method of valuing a residual interest in real property or an equitable
interest in a trust, whether for determining the amount of a charitable donation
or other tax consequences, will vary according to the type of gift, other
interests in the property or trust, and the documentation providing the gift.
The general approach is to value the various interests taking into consideration
the fair market value of the property itself, the current interest rates,
the life expectancy of any life tenants, and any other factors relevant to
the specific case. In the case of property other than real property, the longer
the period before full ownership of the property is passed to the charity,
the more difficult it is to establish its value.

In cases where the size of a residual or equitable interest at the time of
the donation cannot reasonably be determined, such as when a life tenant or
trustee has a right to encroach on the capital of the trust, no deduction
or tax credit in respect of the donation will be allowed.

Example 1

Assume that a trust is created by the will
of a taxpayer to hold property gifted by the deceased to a registered
charity.

The terms of the will require the trustees to pay all of the income
earned by the trust to the taxpayer’s surviving spouse and,
on the death of that spouse, to transfer the property to the charity.

Neither the spouse nor any other person has the power to encroach
on the capital of the trust.

In this case, a testamentary gift of an equitable interest in a trust
is considered to have been made and the taxpayer is deemed to have
made a gift of the interest to the charity in the taxation year in
which he or she died. Once it is established that a gift has been
made, the value of the gift at the time of the transfer must be determined
before it can be claimed for income tax purposes.

Example 2

Assume a taxpayer transfers a property to a trust and the trustee
is instructed to pay all of the income earned by the trust to the
taxpayer during the taxpayer's lifetime and, on the death of the taxpayer,
to transfer the property to a registered charity.

If all of the requirements listed above were satisfied
at the time of the transfer to the trust, an inter vivos gift
of an equitable interest in a trust is considered to have been made
at that time.

Note

Considering the complexity of a charitable remainder trust, your charity
is well advised to consult professional help.